Beige Book Report: San Francisco
January 21, 1993
Summary
Weakness in California continues to offset moderate growth in most
other District states. In California, employment cutbacks continue
in aerospace and defense-related manufacturing, construction, and
trade. Holiday sales in California were characterized as flat to
slightly improved, and the state's fiscal outlook remains troubled.
Outside of California, moderate improvement is reported in several
sectors, with the strongest conditions reported in eastern
Washington, Utah, and Idaho. Holiday sales were characterized as
moderate to strong in most of these areas. However, the Puget Sound
area faces continued uncertainty in aerospace. Overall business
sentiment has improved and recent rains have improved District
agricultural prospects. Little upward pressure on prices is reported
and wage increases are reported to be modest.
Business Sentiment
Sentiment among Twelfth District business leaders has improved since
our last report. Over half of our respondents now expect the real
economy to expand during the next four quarters at a rate of at
least 2.5 percent. This proportion is up from one-third in November.
An additional forty percent of our respondents expect real output to
expand, but at a rate below 2.5 percent.
Wages and Prices
Little upward pressure on prices is reported by contacts in most
District markets. Contacts report flat prices or downward pressure
on prices for new cars, air fares, furniture, paper, and computers.
Aluminum prices are reported as very soft. In Oregon, a contact
reports that cold weather and the closure of a nuclear power plant
is causing utilities to purchase replacement power and will result
in a 10 to 14 percent rise in energy prices in 1993. Another
contact, however, reports that the decline in manufacturing activity
in southern California has resulted in a surplus of electric power,
easing the short-term constraint in Oregon. Projections for wages in
1993 range from flat conditions to 3 percent increases, with
increases in the health care industry running higher than in other
industries.
Retail Trade and Services
Contacts from markets outside of California report good holiday
sales, but lees robust conditions were reported within California.
Strong sales were reported by contacts in Oregon, Washington, Utah,
Idaho, and Arizona. A national retailer reported a 7 to 8 percent
increase in sales in the Northwest. The same retailer, however, had
only a 3 to 5 percent increase in California. Another contact in
California termed retail sales as "disappointing" during the
holidays, with little improvement seen over 1991. A contact in small
business financing reports that sales were below expectations, and
that many retailers are hurting in the San Francisco Bay area.
Activity in the legal industry in California is termed weak, with several firms likely to contract employment in 1993. In addition, a telecommunications firm in California reported further deterioration in demand during November. The California governor has proposed significant cuts in aid to local governments in response so a continued state budget shortfall. The fiscal situation in Oregon is also uncertain, due to a property tax limitation and required increased spending for education. In Washington, the state has announced a budget deficit of $1.2 to $1.7 billion for the next budget cycle.
Manufacturing
District manufacturing activity continues to contract as layoffs in
aerospace and defense-related industries continue in southern
California and Washington. A manufacturer in southern California
describes conditions as very bad, with no improvement in sight and
further layoffs anticipated by major employers. A contact in
northern California reports that layoffs are still a great concern,
and that many small manufacturers are taking a wait-and-see approach
to buying. In the Puget Sound area, concern remains for additional
layoffs in aerospace.
Other District manufacturing activity is showing some improvement. A contact in Oregon reports that electronics manufacturing is on the rebound. Orders for computer equipment also are reported strong for several categories, with foreign demand remaining brisk despite weakness in Japan.
Agriculture and Resource-Related Industries
Recent rains have improved the outlook for water supplies in many
western states. The livestock industry is characterized as in fair
to good shape, although the rain has hampered feed lots. Strong
demand is reported in apple markets and rye grass seed. Wood product
orders are firm, and inventory levels are low. In addition, western
timber supplies are tight due to the lack of timber sales from
public lands.
Construction and Real Estate
Nonresidential real sate and construction markets are reported to be
weak in several District markets. One contact reports that in
southern California hotel rates are declining due to increased room
supply. Another contact in southern California reports that
commercial rents and property values are depressed by high vacancy
rates and continued employment losses. A contact from northern
California reports that values of commercial buildings are falling--
some below replacement cost--and that rents of some buildings are
just covering operating costs.
Mixed conditions are reported in the residential sector. Housing prices in southern California continue to weaken and house prices also are reported softening in the Puget Sound area, particularly for more expensive houses. New house prices in Oregon are reported up 3 to 6 percent in smaller cities, with some lack of building lots reported due to financing constraints on developers. In Utah, housing price are rising and land adjacent to metropolitan areas is also increasing in value.
Financial Institutions
Conditions at District financial institutions are reported as mixed.
Outside of California, contacts report some growth in loan demand
and deposits in Arizona, Utah, and Washington. In California,
contacts report that loan demand remains weak and that the volume of
outstanding loans continues to decline. Asset quality is reported
weak as well, although one contact reports that the pace of
deterioration has slowed recently. One contact reports that the
overall delinquency rate decreased for November. Some increased
demand is reported for residential mortgages and home equity lines
of credit.